Making the maximum possible contributions to retirement accounts each year is not only tax wise but is also one of the best things you can do for your retirement. Making the most of these contributions can be confusing, especially if you or your spouse participate in a retirement plan at work. It is important to know the rules and maximize your contributions each year as there are no provisions that allow you to make up for contribution shortfalls in a future year.

If you have a 401(k) at work, you may already know that you can contribute up to $20,500 in 2022 ($27,000 if you are age 50 or over). These limits are the total combined limits per person (not per job) for 2022 for all 401(k), SEP IRA, and 403(b) plans that you participate in. So if you have more than one employer, you need to be careful not to exceed the overall limit for 2022 for you.

Assuming you or your spouse have a 401(k) plan at work, there are special rules that determine to what extent you can also contribute to an IRA or Roth IRA.

All IRA contribution limits for 2022

The following are the contributions limits per person and are the combined limits for all regular, non-deductible, and Roth IRA contributions, not the amounts that may be contributed to each type.

  • $6,000 under age 50, generally
  • $7,000 age 50 and over, generally

Traditional IRA Contributions

If you make a contribution to a traditional (non-Roth) IRA and you have a 401(k) or another retirement plan at work, the tax-deductibility of that contribution will phase out between $109,000 and $129,000 of modified adjusted gross income (“MAGI”) if married filing jointly ($68,000 to $78,000 for all others). If your MAGI is above these levels, you can still contribute to a traditional IRA, but it would be considered a non-deductible contribution. A contribution to a non-deductible IRA should be considered carefully as a contribution to a Roth IRA would be much preferred for its tax-free growth.

If you do not have a 401(k) or other retirement plans at work, but your spouse does, the deductibility of your IRA contribution phases out between $204,000 and $214,000 of MAGI.

Roth IRA Contributions

Even if you participate in a 401(k) or other retirement plans at work, you can still contribute to a Roth IRA, but the ability to do so phases out for all taxpayers between $204,000 and $214,000 of MAGI for married filing joint ($129,000 and $144,000 for single individuals).

If your income levels are above these limits, you still may be able to contribute to a Roth IRA through something referred to as a “Backdoor Roth Contribution.” Starting in 2010, the income limits for converting a traditional IRA to a Roth IRA were eliminated even though they did not eliminate the income limits for current year contributions directly to a Roth IRA. If you are married filing jointly and your MAGI is over $214,000, you cannot deduct a traditional IRA contribution, nor can you contribute directly to a Roth IRA. However, you can still make a non-deductible traditional IRA contribution then immediately convert that non-deductible IRA to a Roth IRA.

There are a few pitfalls that you should be aware of before attempting the Backdoor Roth Contribution:

  1. If you make a non-deductible contribution to a traditional IRA and wait to convert it to a Roth IRA, any earnings on that contribution will be taxable to you when it is converted to a Roth.
  2. If you have any other non-Roth IRA’s (other than non-deductible IRA’s) such as traditional deductible IRA’S, SEP, or SIMPLE IRA’s (401(k)’s are not included in this), then you may owe tax on the conversion. This is because the IRS makes you combine all of your non-Roth IRA’s together and treat them as one IRA when determining the taxability of the conversion. You cannot just convert the non-deductible amount. For example:
    • You have a Traditional IRA, SEP and/or SIMPLE account with a balance of $11,000, and
    • You contribute $6,000 to a non-deductible IRA this year
    • If you immediately convert the $6,000 non-deductible IRA to a Roth IRA, your tax liability would be computed by:
      • Taking the $6,000 you converted and dividing by the total value of your non-Roth IRA accounts, which is $17,000 in this example.
      • Then, multiplying that percentage by the $6,000 to come up with the taxable amount upon conversion, which is $2,118 in this example.

If you did this, not only would you owe tax, but you have complicated significantly the basis tracking of your remaining non-Roth IRA’s. One workaround to this would be to first transfer all of your non-Roth IRA’s to your 401(k) at work so that the only non-Roth IRA you have left is the non-deductible one. Before doing this, you should carefully weigh the benefits of this compared to the limitations of the investment choices inside of your 401(k) and the fact that you will not be able to transfer it back out at will once you transfer it to the 401(k).

We hope that this helped shed some light on your retirement savings options. As we explained, everyone’s tax situation is different. Please do not hesitate to reach out to a member of our expert team if you have any questions about what option is the best for your situation.

  • This field is for validation purposes and should be left unchanged.